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EX-32.2 - EXHIBIT 32.2 - Western Refining, Inc.exhibit322-wnrx33116.htm
EX-31.2 - EXHIBIT 31.2 - Western Refining, Inc.exhibit312-wnrx33116.htm
EX-31.1 - EXHIBIT 31.1 - Western Refining, Inc.exhibit311-wnrx33116.htm
EX-32.1 - EXHIBIT 32.1 - Western Refining, Inc.exhibit321-wnrx33116.htm

 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2016
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _____ to _____
Commission File Number: 001-32721
WESTERN REFINING, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-3472415
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
123 W. Mills Ave., Suite 200
 
79901
El Paso, Texas
 
(Zip Code)
(Address of principal executive offices)
 
 
Registrant’s telephone number, including area code: (915) 534-1400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of April 29, 2016, there were 91,276,677 shares outstanding, par value $0.01, of the registrant’s common stock.
 
 
 
 
 



WESTERN REFINING, INC. AND SUBSIDIARIES
INDEX

 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101





Forward-Looking Statements
As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, certain statements included throughout this Quarterly Report on Form 10-Q and in particular under the section entitled Part I — Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations relating to matters that are not historical fact should be deemed forward-looking statements that represent management’s beliefs and assumptions based upon currently available information. These forward-looking statements relate to matters such as our industry, including the regulation of our industry, business strategy, our proposal to acquire all of the publicly-held common units of Northern Tier Energy LP ("NTI") not presently held by us, future operations, our expectations for margins and crack spreads, seasonality, the discount between West Texas Intermediate ("WTI") crude oil and Dated Brent crude oil as well as the discount between WTI Cushing and WTI Midland crude oils, volatility of crude oil prices, additions to pipeline capacity in the Permian Basin and at Cushing, Oklahoma, pipeline access to advantaged crude oil, expected share repurchases and dividends, volatility in pricing of Renewable Identification Numbers ("RIN"), taxes, capital expenditures, liquidity and capital resources and other financial and operating information. Forward-looking statements also include those regarding the timing of completion of certain operational and maintenance improvements we are making at our refineries, future operational and refinery efficiencies and cost savings, timing of future maintenance turnarounds, the amount or sufficiency of future cash flows and earnings growth, future expenditures, future contributions related to pension and postretirement obligations, our ability to manage our inventory price exposure through commodity hedging instruments, the impact upon our business of existing and future state and federal regulatory requirements, environmental loss contingency accruals, projected remediation costs or requirements and the expected outcomes of legal proceedings in which we are involved. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “position,” “potential,” “predict,” “project,” “strategy,” “will,” “future” and similar terms and phrases to identify forward-looking statements in this report.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect or that are affected by unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. In addition, our business and operations involve numerous risks and uncertainties, many that are beyond our control, that could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.
When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this quarterly report on Form 10-Q. Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to predict or identify all of these factors, they include, among others, the following:
the possibility that the proposed merger with NTI is not consummated in a timely manner or at all;
the diversion of management in connection with the proposed merger with NTI and our ability to realize the anticipated benefits of the proposed merger with NTI;
availability, costs and price volatility of crude oil, other refinery feedstocks and refined products;
the successful integration and future performance of acquired assets, businesses or third-party product supply, and the possibility that expected synergies may not be achieved;
the impact on us of increased levels and cost of indebtedness used to fund our proposed merger with NTI or the cash portion of the merger consideration and increased cost of existing indebtedness due to the actions taken to consummate the merger with NTI;
our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;
changes in crack spreads;
changes in the spread between WTI crude oil and West Texas Sour crude oil, also known as the sweet/sour spread;
changes in the spread between WTI crude oil and Dated Brent crude oil;
changes in the spread between WTI Cushing crude oil and WTI Midland crude oil;
effects of and exposure to risks related to our commodity hedging strategies and transactions;
availability and costs of renewable fuels for blending and RINs to meet Renewable Fuel Standards ("RFS") obligations;
construction of new or expansion of existing product or crude pipelines by us or our competitors, including in the Permian Basin, the San Juan Basin and at Cushing, Oklahoma;

i


changes in the underlying demand for our refined products;
instability and volatility in the financial markets, including as a result of potential disruptions caused by economic uncertainties, commodity price fluctuations and expectations for changes in interest rates;
a potential economic recession in the United States and/or abroad;
adverse changes in the credit ratings assigned to our and our subsidiaries' debt instruments;
changes in the availability and cost of capital;
actions of customers and competitors;
actions of third-party operators, processors and transporters;
changes in fuel and utility costs incurred by our refineries;
the effect of weather-related problems upon our operations;
disruptions due to equipment interruption, pipeline disruptions or failure at our or third-party facilities;
execution of planned capital projects, cost overruns relating to those projects and failure to realize the expected benefits from those projects;
effects of and costs relating to compliance with current and future local, state and federal environmental, economic, climate change, safety, tax and other laws, policies and regulations and enforcement initiatives;
rulings, judgments or settlements in litigation, tax or other legal or regulatory matters, including unexpected environmental remediation costs in excess of any reserves or insurance coverage;
the price, availability and acceptance of alternative fuels and alternative fuel vehicles;
labor relations;
operating hazards, natural disasters, casualty losses, acts of terrorism including cyber-attacks and other matters beyond our control; and
other factors discussed in more detail under Part I — Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2015 ("2015 10‑K") that are incorporated herein by this reference.
Any one of these factors or a combination of these factors could materially affect our financial condition, results of operations or cash flows and could influence whether any forward-looking statements ultimately prove to be accurate. You are urged to consider these factors carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance upon these forward-looking statements.
Although we believe the forward-looking statements we make in this report related to our plans, intentions and expectations are reasonable, we can provide no assurance that such plans, intentions or expectations will be achieved. These statements are based upon assumptions made by us based upon our experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in the circumstances. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. The forward-looking statements included herein are made only as of the date of this report and we are not required to (and will not) update any information to reflect events or circumstances that may occur after the date of this report, except as required by applicable law.

ii


Part I
Financial Information
Item 1.
Financial Statements
WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
 
March 31,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents (WNRL: $28,653 and $44,605, respectively)
$
593,101

 
$
772,502

Accounts receivable, trade, net of a reserve for doubtful accounts of $195 and $169, respectively (WNRL: $60,946 and $55,053, respectively)
337,077

 
359,237

Inventories (WNRL: $12,476 and $15,200, respectively)
683,593

 
547,538

Prepaid expenses (WNRL: $5,380 and $4,133, respectively)
79,971

 
73,213

Other current assets (WNRL: $5,510 and $5,562, respectively)
159,591

 
169,728

Total current assets
1,853,333

 
1,922,218

Restricted cash
36,783

 
69,106

Equity method investment
102,971

 
97,513

Property, plant and equipment, net (WNRL: $324,342 and $321,251, respectively)
2,324,591

 
2,305,171

Goodwill
1,289,443

 
1,289,443

Intangible assets, net (WNRL: $7,566 and $7,757, respectively)
85,275

 
84,945

Other assets, net (WNRL: $3,348 and $3,376, respectively)
61,366

 
64,997

Total assets
$
5,753,762

 
$
5,833,393

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable (WNRL: $14,663 and $9,489, respectively)
$
562,430

 
$
553,957

Accrued liabilities (WNRL: $25,858 and $30,378, respectively)
218,752

 
248,395

Current portion of long-term debt
5,500

 
5,500

Total current liabilities
786,682

 
807,852

Long-term liabilities:
 
 
 
Long-term debt, less current portion (WNRL: $422,810 and $437,467, respectively)
1,652,592

 
1,644,894

Lease financing obligations
53,190

 
53,232

Deferred income tax liability, net
341,475

 
312,914

Other liabilities (WNRL: $9 in both periods)
69,023

 
68,595

Total long-term liabilities
2,116,280

 
2,079,635

Commitments and contingencies


 


Equity:
 
 
 
Western shareholders' equity:
 
 
 
Common stock, par value $0.01, 240,000,000 shares authorized; 102,828,650 and 102,773,705 shares issued, respectively
1,028

 
1,028

Preferred stock, par value $0.01, 10,000,000 shares authorized; no shares issued or outstanding

 

Additional paid-in capital
492,847

 
492,848

Retained earnings
1,162,876

 
1,167,938

Accumulated other comprehensive loss, net of tax
651

 
651

Treasury stock, 11,551,973 and 9,089,623 shares, respectively at cost
(438,168
)
 
(363,168
)
Total Western shareholders' equity
1,219,234

 
1,299,297

Non-controlling interests
1,631,566

 
1,646,609

Total equity
2,850,800

 
2,945,906

Total liabilities and equity
$
5,753,762

 
$
5,833,393


The accompanying notes are an integral part of these condensed consolidated financial statements.
1




WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Net sales
$
1,455,504

 
$
2,318,730

Operating costs and expenses:
 
 
 
Cost of products sold (exclusive of depreciation and amortization)
1,047,361

 
1,741,310

Direct operating expenses (exclusive of depreciation and amortization)
223,585

 
215,311

Selling, general and administrative expenses
53,285

 
55,803

Loss (gain) on disposal of assets, net
(130
)
 
282

Maintenance turnaround expense
125

 
105

Depreciation and amortization
52,651

 
49,926

Total operating costs and expenses
1,376,877

 
2,062,737

Operating income
78,627

 
255,993

Other income (expense):
 
 
 
Interest income
164

 
163

Interest and debt expense
(26,681
)
 
(24,957
)
Other, net
6,104

 
3,206

Income before income taxes
58,214

 
234,405

Provision for income taxes
(18,629
)
 
(59,437
)
Net income
39,585

 
174,968

Less net income attributable to non-controlling interests
9,047

 
68,979

Net income attributable to Western Refining, Inc.
$
30,538

 
$
105,989

 
 
 
 
Net earnings per share:
 
 
 
Basic
$
0.34

 
$
1.11

Diluted
0.33

 
1.11

Weighted-average common shares outstanding:
 
 
 
Basic
92,078

 
95,567

Diluted
92,144

 
95,682

 
 
 
 
Cash dividends declared per common share
$
0.38

 
$
0.30





The accompanying notes are an integral part of these condensed consolidated financial statements.
2




WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Net income
$
39,585

 
$
174,968

Other comprehensive income items:
 
 
 
Benefit plans:
 
 
 
Reclassification of loss to income

 
13

Other comprehensive income before tax

 
13

Income tax

 
(5
)
Other comprehensive income, net of tax

 
8

Comprehensive income
39,585

 
174,976

Less comprehensive income attributable to non-controlling interests
9,047

 
68,979

Comprehensive income attributable to Western Refining, Inc.
$
30,538

 
$
105,997




The accompanying notes are an integral part of these condensed consolidated financial statements.
3




WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
39,585

 
$
174,968

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
52,651

 
49,926

Changes in fair value of commodity hedging instruments
12,483

 
20,057

Reserve for doubtful accounts
26

 
(46
)
Amortization of loan fees and original issue discount
1,628

 
1,515

Stock-based compensation expense
6,181

 
4,010

Deferred income taxes
28,561

 
4,989

Excess tax benefit from stock-based compensation

 
(337
)
Income from equity method investment, net of dividends
(5,517
)
 
(3,619
)
Loss (gain) on disposal of assets, net
(130
)
 
282

Changes in operating assets and liabilities:
 
 
 

Accounts receivable
21,824

 
19,016

Inventories
(136,055
)
 
(43,851
)
Prepaid expenses
(6,758
)
 
11,909

Other assets
(62
)
 
(33,451
)
Accounts payable and accrued liabilities
(14,362
)
 
(99,041
)
Other long-term liabilities
1,049

 
(1,349
)
Net cash provided by operating activities
1,104

 
104,978

Cash flows from investing activities:
 
 
 
Capital expenditures
(79,029
)
 
(53,195
)
Use of restricted cash
32,323

 
43,400

Proceeds from the sale of assets
219

 
624

Net cash used in investing activities
(46,487
)
 
(9,171
)
Cash flows from financing activities:
 
 
 
Additions to long-term debt

 
300,000

Payments on long-term debt and capital lease obligations
(1,922
)
 
(1,375
)
Borrowings on revolving credit facility
70,000

 

Repayments on revolving credit facility
(62,500
)
 
(269,000
)
Deferred financing costs

 
(6,551
)
Purchase of common stock for treasury
(75,000
)
 
(25,000
)
Distribution to non-controlling interest holders
(28,995
)
 
(33,665
)
Dividends paid
(35,601
)
 
(28,638
)
Excess tax benefit from stock-based compensation

 
337

Net cash used in financing activities
(134,018
)
 
(63,892
)
Net increase (decrease) in cash and cash equivalents
(179,401
)
 
31,915

Cash and cash equivalents at beginning of period
772,502

 
431,159

Cash and cash equivalents at end of period
$
593,101

 
$
463,074



The accompanying notes are an integral part of these condensed consolidated financial statements.
4




WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization
"Western," "we," "us," "our" and the "Company" refer to Western Refining, Inc. and, unless the context otherwise requires, our subsidiaries. Western Refining, Inc. was formed on September 16, 2005, as a holding company prior to our initial public offering and is incorporated in Delaware.
We produce refined products at three refineries: one in El Paso, Texas, one near Gallup, New Mexico and one in St. Paul Park, Minnesota. We sell refined products in Arizona, Colorado, Minnesota, New Mexico, Wisconsin, West Texas, the Mid-Atlantic region and Mexico. Our product sales occur through bulk distribution terminals, wholesale marketing networks and two retail networks with a total of 541 company-owned and franchised retail sites in the United States.
At March 31, 2016, we owned a 38.3% limited partner interest in Northern Tier Energy LP ("NTI") and the public held a 61.7% limited partner interest. We control NTI through our 100% ownership of its general partner. NTI owns and operates a refinery in St. Paul Park, Minnesota and has a retail-marketing network of 283 convenience stores; 114 of which operate through franchise agreements. NTI's primary areas of operation include Minnesota and Wisconsin.
We entered into an Agreement and Plan of Merger dated as of December 21, 2015 (the “Merger Agreement”) with Western Acquisition Co, LLC, a wholly-owned subsidiary of Western (“MergerCo”), NTI and Northern Tier Energy GP LLC, to acquire all of NTI’s outstanding common units not already held by us (the “Merger”). Each of the outstanding NTI common units held by unitholders other than us (the “NTI Public Unitholders”) will be converted under the terms of the Merger Agreement, into the right to receive, subject to election by the NTI Public Unitholders and proration, (i) $15.00 in cash without interest and 0.2986 of a share of Western’s common stock, par value $0.01 per share (“Western Common Stock”), (ii) $26.06 in cash without interest or (iii) 0.7036 of a share of Western Common Stock. Upon the terms and subject to the conditions set forth in the Merger Agreement, MergerCo will merge with and into NTI and the separate limited liability company existence of MergerCo will cease and NTI will continue to exist, as a limited partnership under Delaware law and as our indirect wholly-owned subsidiary, as the surviving entity in the Merger. The Merger is expected to close in the second quarter of 2016, pending the satisfaction of certain customary conditions and the approval of the Merger and other matters at a special meeting of NTI unitholders by the affirmative vote of holders of a majority of the outstanding NTI common units (including the NTI common units held by us). The transaction is expected to result in 17.2 million additional shares of Western Common Stock outstanding. 
Consistent with NTI’s distribution policy, cash distributions with respect to the second quarter of 2016, if any, would normally be declared and paid in August 2016. However, pursuant to the terms of the Merger Agreement, with respect to the quarter in which the closing date ("Closing Date") occurs, which is currently expected to be the second quarter of 2016, assuming all closing conditions are satisfied, NTI will, to the extent it generates available cash in such quarter, make a prorated quarterly distribution to unitholders of record as of immediately prior to the effective time of the Merger (the “Effective Time”) of any such available cash if the record date for the Western's quarterly cash dividend to be paid in that quarter occurs before the Closing Date. Accordingly, in the quarter that the Closing Date occurs, NTI common unitholders who receive Western Common Stock in the Merger will receive (i) an NTI cash distribution in respect of the previous quarter, to the extent that NTI generates available cash in such quarter, and (ii) either an NTI prorated cash distribution in respect of available cash generated by NTI in the quarter in which the Closing Date occurs or (assuming such unitholders continue to hold the shares of Western Common Stock received in the Merger through the record date for such Western dividend) the Western quarterly cash dividend payable in the quarter in which the Closing Date occurs. The amount of any distribution will not have any effect on the merger consideration to be received by the NTI’s unitholders. See Note 21, NTI, for further discussion.
At March 31, 2016, we owned a 66.4% limited partner interest in Western Refining Logistics, LP ("WNRL") and the public held a 33.6% limited partner interest. We control WNRL through our 100% ownership of its general partner and we own the majority of WNRL's limited partnership interests. WNRL owns and operates logistics assets consisting of pipeline and gathering, terminalling, storage and transportation assets as well a wholesale business that operates primarily in the Southwest. WNRL operates its logistics assets primarily for the benefit of the Company. See Note 22, WNRL, for further discussion.
On October 30, 2015, we sold a 375 mile segment of the TexNew Mex Pipeline system to WNRL that extends from WNRL's crude oil station in Star Lake, New Mexico, in the Four Corners region to its T station in Eddy County, New Mexico (the "TexNew Mex Pipeline System"). We also sold an 80,000 barrel crude oil storage tank located at WNRL's crude oil pumping station in Star Lake, New Mexico and certain other related assets. WNRL acquired these assets from us in exchange for $170 million in cash, 421,031 common units representing limited partner interests in WNRL and 80,000 units of a newly created class of limited partner interests in WNRL, referred to as the "TexNew Mex Units." We refer to this transaction as the "TexNew Mex Pipeline Transaction."

5

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The WNRL financial and operational data presented includes the historical results of all assets acquired from Western in the TexNew Mex Pipeline Transaction. The acquisition from Western was a transfer of assets between entities under common control. Accordingly, the financial information contained herein for WNRL has been retrospectively adjusted, to include the historical results of the TexNew Mex Pipeline System assets acquired, for periods prior to the effective date of the TexNew Mex Pipeline Transaction.
Our operations include four business segments: refining, NTI, WNRL and retail. See Note 3, Segment Information, for further discussion of our business segments.
2. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principals ("GAAP") for interim consolidated financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016, or for any other period.
The Condensed Consolidated Balance Sheet at December 31, 2015 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Western and our subsidiaries. We own a 38.3% limited partner interest in NTI and a 66.4% limited partner interest in WNRL. We own 100% of NTI's and WNRL's respective general partners. As the general partner of NTI and WNRL, we have the ability to direct the activities of NTI and WNRL that most significantly impact their respective economic performance. We have reported non-controlling interests for NTI and WNRL of $1,631.6 million and $1,646.6 million in our Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015, respectively. All intercompany accounts and transactions have been eliminated for all periods presented. Investments in significant non-controlled entities are accounted for using the equity method.
Variable Interest Entity
WNRL is a variable interest entity ("VIE") as defined under GAAP. A VIE is a legal entity whose equity owners do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or, as a group, the equity holders lack the power, through voting rights, to direct the activities that most significantly impact the entity's financial performance, the obligation to absorb the entity's expected losses or rights to expected residual returns. As the general partner of WNRL, we have the sole ability to direct the activities of WNRL that most significantly impact WNRL's financial performance, and therefore we consolidate WNRL. See Note 22, WNRL, for further discussion.
Goodwill and Other Unamortizable Intangible Assets
Goodwill represents the excess of the purchase price (cost) over the fair value of the net assets acquired and is carried at cost. We do not amortize goodwill for financial reporting purposes. We test goodwill for impairment at the reporting unit level. The reporting unit or units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business is managed. Our policy is to test goodwill and other unamortizable intangible assets for impairment annually at June 30, or more frequently if indications of impairment exist.
The risk of goodwill and intangible asset impairment losses may increase to the extent that NTI’s market capitalization, results of operations, or cash flows decline. Impairment losses may result in a material, non-cash write-down of goodwill or intangible assets. Furthermore, impairment losses could have a material adverse effect on the Company’s results of operations and shareholders’ equity.
Use of Estimates and Seasonality
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Demand for gasoline is generally higher during the summer months than during the winter months. As a result, our operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year. During 2014 and continuing into 2015, the volatility in crude oil prices and refining margins contributed to the variability of our results of operations.
Recent Accounting Pronouncements
Effective January 1, 2016, we adopted the revised accounting and reporting requirements included in the Accounting Standards Codification ("ASC") for consolidation of limited partnerships or similar entities. We have applied the new standards retrospectively. The adoption of these revised standards did not result in any change to our consolidation conclusions or impact our financial position, results of operations or cash flows. We have added disclosures for WNRL as required for entities not previously included in the reporting entity as a variable interest entity.
From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on our accounting and reporting. We are currently evaluating the effect that certain of these new accounting requirements may have on our accounting and related reporting and disclosures in our condensed consolidated financial statements.
Recognition and reporting of revenues - the requirements were amended to remove inconsistencies in revenue requirements and to provide a more complete framework for addressing revenue issues across a broad range of industries and transaction types. The revised standard’s core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised standard also addresses principal versus agent considerations and indicators related to transfer of control over specified goods. These provisions are effective January 1, 2018, and are to be applied retrospectively, with early adoption permitted for periods beginning after December 15, 2016, and interim periods thereafter.
Lease accounting - the requirements were amended in regards to recognizing lease assets and lease liabilities on the balance sheet and disclosing information about leasing arrangements. The core principle is that a lessee should recognize the assets and liabilities that arise from leases. These provisions are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.
Employee share-based payment accounting - the requirements involve several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. These provisions are effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted in any interim or annual period.
Recognition of breakage for certain prepaid stored-value products - the requirements align recognition of the financial liabilities related to prepaid stored-value products with the revenue recognition standard discussed above for non-financial liabilities. Certain of these liabilities may be extinguished proportionally in earnings as redemptions occur, or when redemption is remote if issuers are not entitled to the unredeemed stored value. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 with early adoption permitted subject to certain requirements.
Derivatives and hedging: contingent put and call options in debt instruments - the requirements will reduce diversity of practice in identifying embedded derivatives in debt instruments and clarify the nature of an exercise contingency is not subject to the “clearly and closely” criteria for purposes of assessing whether the call or put option must be separated from the debt instrument and accounted for separately as a derivative. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 with early adoption permitted subject to certain requirements.
3. Segment Information
Our operations are organized into four operating segments based on manufacturing and marketing criteria and the nature of our products and services, our production processes and our types of customers. These segments are refining, NTI, WNRL and retail.

7

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We treated the TexNew Mex Pipeline System assets that we sold to WNRL in the TexNew Mex Pipeline Transaction as a transfer of assets between entities under common control. Accordingly, we have retrospectively adjusted the financial information for the affected reporting segments to include or exclude the historical results of the transferred assets for periods prior to the effective date of the transaction. The TexNew Mex Pipeline System was moved from the refining segment to the WNRL segment.
A description of each segment and the principal products follows:
Refining. We report the operations of two refineries in our refining segment: one in El Paso, Texas (the "El Paso refinery") with a 131,000 barrel per day ("bpd") capacity and one near Gallup, New Mexico (the "Gallup refinery") with a 25,000 bpd capacity. Our refineries make various grades of gasoline, diesel fuel and other products from crude oil, other feedstocks and blending components. We purchase crude oil, other feedstocks and blending components from various third-party suppliers. We also acquire refined products through exchange agreements and from various third-party suppliers to supplement supply to our customers. We sell these products to WNRL, to our retail segment, to other independent wholesalers and retailers, commercial accounts and sales and exchanges with major oil companies.
We have an exclusive supply and marketing agreement with a third party covering activities related to our refined product supply, sales and hedging in the Mid-Atlantic region. We recorded $1.4 million and $1.8 million in assets at March 31, 2016 and December 31, 2015, respectively, related to this supply agreement in our Condensed Consolidated Balance Sheets. The revenues and costs recorded under the supply agreement included $26.4 million and $21.5 million in net hedging gains for the three months ended March 31, 2016 and 2015, respectively.
NTI. NTI is an independent crude oil refiner and marketer of refined products with a 98,000 bpd refinery in St. Paul Park, Minnesota and a network of retail convenience stores selling various grades of gasoline, diesel fuel and convenience store merchandise, primarily in Minnesota and Wisconsin. NTI's operations are separate from those of Western. As of March 31, 2016, NTI included the operations of 169 retail convenience stores and supported 114 franchised retail convenience stores. NTI's refinery supplies the majority of the gasoline and diesel fuel sold through its retail convenience stores.
WNRL. WNRL owns and operates pipeline and gathering, terminalling, storage and transportation assets that provide logistics services to our refining segment in the Southwest, including 685 miles of pipelines and 8.2 million barrels of active storage capacity. The majority of WNRL's logistics assets are integral to the operations of the El Paso and Gallup refineries.
WNRL also owns a wholesale business that operates primarily in the Southwest. WNRL's wholesale business includes the operations of several lubricant and bulk petroleum distribution plants and a fleet of crude oil, refined product and lubricant delivery trucks. WNRL distributes commercial wholesale petroleum products primarily in Arizona, California, Colorado, Nevada, New Mexico and Texas. WNRL purchases petroleum fuels and lubricants from our refining segment and from third-party suppliers.
Retail. Our Southwest retail business sells various grades of gasoline, diesel fuel, convenience store merchandise and beverage and food products to the general public through retail convenience stores and various grades of gasoline and diesel fuel to commercial vehicle fleets through unmanned fleet fueling sites ("cardlocks"). WNRL supplies the majority of gasoline and diesel fuel that our retail segment sells. We purchase general merchandise and beverage and food products from various third-party suppliers. At March 31, 2016, the retail segment operated 258 service stations and convenience stores or kiosks located in Arizona, Colorado, New Mexico and Texas compared to 261 service stations and convenience stores or kiosks at March 31, 2015. At March 31, 2016, the retail segment operated 52 cardlocks located in Arizona, California, Colorado, New Mexico and Texas compared to 50 cardlocks at March 31, 2015.
Segment Accounting Principles. Operating income for each segment consists of net revenues less cost of products sold; direct operating expenses; selling, general and administrative expenses; net impact of the disposal of assets and depreciation and amortization. The refining and NTI segments also include costs related to periodic maintenance turnaround activities. Cost of products sold includes net realized and unrealized gains and losses related to our commodity hedging activities and reflects current costs adjusted, where appropriate, for "last-in, first-out" ("LIFO") and lower of cost or market ("LCM") inventory adjustments. Intersegment revenues are reported at prices that approximate market.
Activities of our business that are not included in the four segments mentioned above are included in the Other category. These activities consist primarily of corporate staff operations and other items that are not specific to the normal business of any one of our four operating segments. We do not allocate certain items of other income and expense, including income taxes, to the individual segments. NTI and WNRL are primarily pass-through entities with respect to income taxes.
The total assets of each segment consist primarily of cash and cash equivalents; inventories; net accounts receivable; net property, plant and equipment and other assets directly associated with the individual segment’s operations. Included in the

8

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

total assets of the corporate operations are cash and cash equivalents; various net accounts receivable; prepaid expenses; other current assets; net property, plant and equipment and other long-term assets.
Disclosures regarding our reportable segments with reconciliations to consolidated totals for the three months ended March 31, 2016 and 2015 are presented below:
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(In thousands)
Operating Results:
 
 
 
Refining (2)
 
 
 
Net sales
$
886,320

 
$
1,491,441

Intersegment eliminations
467,807

 
542,542

Net refining sales to external customers
418,513

 
948,899

NTI
 
 
 
Net sales
497,473

 
697,776

Intersegment eliminations
8,696

 
12,990

Net NTI sales to external customers
488,777

 
684,786

WNRL (2)
 
 
 
Net sales
468,039

 
607,396

Intersegment eliminations
149,462

 
178,249

Net WNRL sales to external customers
318,577

 
429,147

Retail
 
 
 
Net sales
231,186

 
258,602

Intersegment eliminations
1,549

 
2,704

Net retail sales to external customers
229,637

 
255,898

 
 
 
 
Consolidated net sales to external customers
$
1,455,504

 
$
2,318,730

 
 
 
 
Operating income (loss)
 
 
 
Refining (1) (2)
$
62,138

 
$
148,612

NTI (1)
8,115

 
107,987

WNRL (2)
21,438

 
17,561

Retail
2,432

 
(441
)
Other
(15,496
)
 
(17,726
)
Operating income from segments
78,627

 
255,993

Other income (expense), net
(20,413
)
 
(21,588
)
Consolidated income before income taxes
$
58,214

 
$
234,405

 
 
 
 

9

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Three Months Ended
 
March 31,
 
2016
 
2015
Depreciation and amortization
 
 
 
Refining (2)
$
21,285

 
$
20,484

NTI
19,969

 
19,365

WNRL (2)
7,144

 
5,892

Retail
3,330

 
3,286

Other
923

 
899

Consolidated depreciation and amortization
$
52,651

 
$
49,926

 
 
 
 
Capital expenditures
 
 
 
Refining (2)
$
43,563

 
$
17,826

NTI
27,990

 
6,673

WNRL (2)
6,241

 
25,996

Retail
637

 
1,402

Other
598

 
1,298

Consolidated capital expenditures
$
79,029

 
$
53,195

 
 
 
 
Total assets
 
 
 
Refining (2)
$
1,620,113

 
$
1,606,073

NTI (including $1,289,443 of goodwill)
2,328,446

 
2,258,695

WNRL (2)
448,218

 
495,028

Retail
239,359

 
249,318

Other
1,117,626

 
1,075,408

Consolidated total assets
$
5,753,762

 
$
5,684,522

(1)
The effect of our economic hedging activity is included within the operating income of our refining and NTI segments as a component of cost of products sold. The cost of products sold within our refining segment included $6.0 million in net realized and unrealized economic hedging gains and $3.7 million in net realized and unrealized economic hedging losses for the three months ended March 31, 2016 and 2015, respectively. NTI cost of products sold included $0.7 million in net realized and unrealized economic hedging losses and $1.2 million in net realized and unrealized economic hedging gains for the three months ended March 31, 2016 and 2015, respectively. Also included within cost of products sold is the net effect of non-cash LCM recoveries of $40.7 million and $4.9 million for our refining segment and $11.0 million and $10.8 million for NTI for the three months ended March 31, 2016 and 2015, respectively.
(2)
WNRL's financial data includes its historical financial results and an allocated portion of corporate general and administrative expenses, previously reported as Other, for the three months ended March 31, 2015. Refining operating results include activity of the TexNew Mex Pipeline System that was previously recorded within our refining segment. The information contained herein for WNRL has been retrospectively adjusted, to include the historical results of the TexNew Mex Pipeline System.
4. Fair Value Measurement
We utilize the market approach when measuring fair value of our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The fair value hierarchy consists of the following three levels:
Level 1
Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

10

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Level 2
Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs that are derived principally from or corroborated by observable market data.
Level 3
Inputs are derived from valuation techniques that one or more significant inputs or value drivers are unobservable and cannot be corroborated by market data or other entity-specific inputs.
The carrying amounts of cash and cash equivalents, which we consider Level 1 assets and liabilities, approximated their fair values at March 31, 2016 and December 31, 2015, due to their short-term maturities. Our fair value assessment incorporates a variety of considerations, including the short-term duration of the instruments and an evaluation of counterparty credit risk. Cash equivalents totaling $70.1 million consisting of short-term money market deposits and commercial paper were included in the Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015.
We maintain cash deposits with various counterparties in support of our hedging and trading activities. These deposits are required by counterparties as collateral and cannot be offset against the fair value of open contracts except in the event of default. Certain of our commodity derivative contracts under master netting arrangements include both asset and liability positions. We have elected to offset the fair value amounts recognized for multiple similar derivative instruments executed with the same counterparty under the column "Netting Adjustments" below; however, fair value amounts by hierarchy level are presented on a gross basis in the tables below. See Note 13, Crude Oil and Refined Product Risk Management, for further discussion of master netting arrangements.
The following tables represent our assets and liabilities for our commodity hedging contracts measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015, and the basis for that measurement:
 
Carrying Value at March 31, 2016
 
Fair Value Measurement Using
 
Netting Adjustments
 
Recorded Value at March 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(In thousands)
Gross financial assets:
 
 
 
 
 
 
 
 
 
 
 
Other current assets
$
86,144


$


$
86,144


$


$
(19,080
)

$
67,064

Other assets
8,019




8,019




(867
)

7,152

Gross financial liabilities:
 

 

 

 




Accrued liabilities
(12,647
)



(8,689
)

(3,958
)

5,510


(7,137
)
Other long-term liabilities
(14,437
)



(14,437
)



14,437



 
$
67,079

 
$

 
$
71,037

 
$
(3,958
)
 
$

 
$
67,079

 
Carrying Value at December 31, 2015
 
Fair Value Measurement Using
 
Netting Adjustments
 
Recorded Value at December 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(In thousands)
Gross financial assets:
 
 
 
 
 
 
 
 
 
 
 
Other current assets
$
95,062


$


$
95,062


$


$
(16,937
)

$
78,125

Other assets
11,881




11,881






11,881

Gross financial liabilities:
 

 

 

 




Accrued liabilities
(21,454
)



(15,698
)

(5,756
)

11,181


(10,273
)
Other long-term liabilities
(5,756
)



(5,756
)



5,756



 
$
79,733

 
$

 
$
85,489

 
$
(5,756
)
 
$

 
$
79,733

Commodity hedging contracts designated as Level 3 financial assets consisted of jet fuel crack spread swaps. Ultra-low sulfur diesel ("ULSD") pricing has had a strong historical correlation to jet fuel crack spread swaps. We estimate the fair value of our Level 3 instruments based on the differential between quoted market settlement prices on ULSD futures and quoted market settlement prices on jet fuel futures for settlement dates corresponding to each of our outstanding Level 3 jet fuel crack spread swaps. As quoted prices for similar assets or liabilities in an active market are available, we reclassify the underlying financial asset or liability and designate them as Level 2 prior to final settlement.

11

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Carrying amounts of commodity hedging contracts reflected as financial assets are included in both current and non-current other assets in the Condensed Consolidated Balance Sheets. Carrying amounts of commodity hedging contracts reflected as financial liabilities are included in both accrued and other long-term liabilities in the Condensed Consolidated Balance Sheets. Fair value adjustments referred to as credit valuation adjustments ("CVA") are included in the carrying amounts of commodity hedging contracts. CVAs are intended to adjust the fair value of counterparty contracts as a function of a counterparty's credit rating and reflect the credit quality of each counterparty to arrive at contract fair values.
The following table presents the changes in fair value of our Level 3 assets and liabilities, excluding goodwill (all related to commodity price swap contracts) for the three months ended March 31, 2016 and 2015.
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(In thousands)
Asset (liability) balance at beginning of period
$
(5,756
)
 
$
330

Change in fair value
186

 

Fair value of trades entered into during the period

 
1,462

Fair value reclassification from Level 3 to Level 2
1,612

 
(82
)
Asset (liability) balance at end of period
$
(3,958
)
 
$
1,710

A hypothetical change of 10% to the estimated future cash flows attributable to our Level 3 commodity price swaps would result in a $0.4 million change in the estimated fair value at March 31, 2016.
As of March 31, 2016 and December 31, 2015, the carrying amount and estimated fair value of our debt was as follows:
 
March 31,
2016
 
December 31,
2015
 
(In thousands)
Western obligations:
 
 
 
Carrying amount
$
887,625

 
$
889,000

Fair value
838,373

 
867,178

NTI obligations:
 
 
 
Carrying amount
$
372,500

 
$
350,000

Fair value
367,250

 
360,500

WNRL obligations:
 
 
 
Carrying amount
$
430,000

 
$
445,000

Fair value
400,000

 
439,000

The carrying amount of our debt is the amount reflected in the Condensed Consolidated Balance Sheets, including the current portion. The fair value of the debt was determined using Level 2 inputs.
There have been no transfers between assets or liabilities whose fair value is determined through the use of quoted prices in active markets (Level 1) and those determined through the use of significant other observable inputs (Level 2).

12

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. Inventories
Inventories were as follows:
 
March 31,
2016
 
December 31,
2015
 
(In thousands)
Refined products (1)
$
267,861

 
$
201,928

Crude oil and other raw materials
362,415

 
288,403

Lubricants
12,356

 
14,996

Retail store merchandise
40,961

 
42,211

Inventories
$
683,593

 
$
547,538

(1)
Includes $15.0 million and $14.5 million of inventory valued using the first-in, first-out ("FIFO") valuation method at March 31, 2016 and December 31, 2015, respectively.
We value our refinery inventories of crude oil, other raw materials and asphalt at the lower of cost or market under the LIFO valuation method. Other than refined products inventories held by WNRL and our retail segment, refined products inventories are valued under the LIFO valuation method. WNRL's wholesale refined product, lubricants and related inventories are valued using the FIFO inventory valuation method. Retail refined product inventory is valued using the FIFO inventory valuation method. Retail merchandise inventory is valued using the retail inventory method.
As of March 31, 2016 and December 31, 2015, refined products valued under the LIFO method and crude oil and other raw materials totaled 12.6 million barrels and 10.0 million barrels, respectively. At March 31, 2016 and December 31, 2015, the excess of the LIFO cost over the current cost of these crude oil, refined product and other feedstock and blendstock inventories was $221.4 million and $198.4 million, respectively.
During the three months ended March 31, 2016 and 2015, cost of products sold included net non-cash credits of $23.0 million and $113.6 million, respectively, from changes in our LIFO reserves. In order to state our inventories at market values that were lower than our LIFO costs, we reduced the carrying values of our inventory through non-cash LCM inventory adjustments of $123.4 million and $175.1 million at March 31, 2016 and December 31, 2015, respectively. These non-cash LCM recoveries decreased cost of products sold by $51.7 million and $15.7 million for the three months ended March 31, 2016 and 2015, respectively.
Average LIFO cost per barrel of our refined products and crude oil and other raw materials inventories as of March 31, 2016 and December 31, 2015, were as follows:
 
March 31, 2016
 
December 31, 2015
 
Barrels
 
LIFO Cost
 
Average
LIFO
Cost Per
Barrel
 
Barrels
 
LIFO Cost
 
Average
LIFO
Cost Per
Barrel
 
(In thousands, except cost per barrel)
Refined products
5,130

 
$
314,934

 
$
61.39

 
3,536

 
$
259,722

 
$
73.45

Crude oil and other
7,462

 
423,694

 
56.78

 
6,490

 
391,237

 
60.28

 
12,592

 
$
738,628

 
58.66

 
10,026

 
$
650,959

 
64.93

6. Equity Method Investment
NTI owns a 17% common equity interest in Minnesota Pipe Line Company, LLC ("MPL"). The carrying value of this equity method investment was $103.0 million and $97.5 million at March 31, 2016 and December 31, 2015, respectively.
As of March 31, 2016 and December 31, 2015, the carrying amount of the equity method investment was $21.3 million higher than the underlying net assets of the investee. We are amortizing this difference over the remaining life of MPL’s primary asset (the fixed asset life of the pipeline). There is no market for the common units of MPL and, accordingly, no quoted market price is available.
We received no distributions during the three months ended March 31, 2016. During the three months ended March 31, 2015, we recognized $3.7 million in declared but unpaid distributions from MPL. Equity income from MPL for the three

13

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

months ended March 31, 2016 and 2015, was $5.5 million and $3.6 million, respectively. Equity income has been included in other, net in the accompanying Condensed Consolidated Statements of Operations.
7. Property, Plant and Equipment, Net
Property, plant and equipment, net was as follows:
 
March 31,
2016
 
December 31,
2015
 
(In thousands)
Refinery facilities and related equipment
$
2,390,745

 
$
2,348,663

Pipelines, terminals and transportation equipment
559,040

 
533,040

Retail facilities and related equipment
329,808

 
328,419

Wholesale facilities and related equipment
61,369

 
61,133

Corporate
51,451

 
50,812

 
3,392,413

 
3,322,067

Accumulated depreciation
(1,067,822
)
 
(1,016,896
)
Property, plant and equipment, net
$
2,324,591

 
$
2,305,171

Depreciation expense was $51.6 million and $48.9 million for the three months ended March 31, 2016 and 2015, respectively.
8. Intangible Assets, Net
Intangible assets, net was as follows:
 
March 31, 2016
 
December 31, 2015
 
Weighted- Average Amortization Period
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
 
(In thousands)
 
 
Amortizable assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Licenses and permits
$
20,427

 
$
(14,124
)
 
$
6,303

 
$
20,427

 
$
(13,729
)
 
$
6,698

 
4.0
Customer relationships
7,551

 
(4,060
)
 
3,491

 
7,551

 
(3,921
)
 
3,630

 
6.3
Rights-of-way and other
7,905

 
(1,999
)
 
5,906

 
6,839

 
(1,797
)
 
5,042

 
8.6
 
35,883

 
(20,183
)
 
15,700

 
34,817

 
(19,447
)
 
15,370

 
 
Unamortizable assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Franchise rights and trademarks
50,500

 

 
50,500

 
50,500

 

 
50,500

 
 
Liquor licenses
19,075

 

 
19,075

 
19,075

 

 
19,075

 
 
Intangible assets, net
$
105,458

 
$
(20,183
)
 
$
85,275

 
$
104,392

 
$
(19,447
)
 
$
84,945

 
 
Intangible asset amortization expense for the three months ended March 31, 2016 was $0.7 million based on estimated useful lives ranging from 1 to 35 years. Intangible asset amortization expense for the three months ended March 31, 2015 was $0.7 million based on estimated useful lives ranging from 1 to 23 years.
Estimated amortization expense for the indicated periods is as follows (in thousands):
Remainder of 2016
$
2,204

2017
2,906

2018
2,905

2019
2,237

2020
1,292

2021
1,006


14

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9. Long-Term Debt
Long-term debt was as follows:
 
March 31,
2016
 
December 31,
2015
 
(In thousands)
Western obligations:
 
 
 
Revolving Credit Facility due 2019
$

 
$

Term Loan Credit Facility due 2020
537,625

 
539,000

6.25% Senior Unsecured Notes due 2021
350,000

 
350,000

Total Western obligations
887,625

 
889,000

NTI obligations:
 
 
 
Revolving Credit Facility due 2019
22,500

 

7.125% Senior Secured Notes due 2020
350,000

 
350,000

Total NTI obligations
372,500

 
350,000

WNRL obligations:
 
 
 
Revolving Credit Facility due 2018
130,000

 
145,000

7.5% Senior Notes due 2023
300,000

 
300,000

Total WNRL obligations
430,000

 
445,000

Less unamortized premium and debt issuance costs
32,033

 
33,606

Long-term debt
1,658,092

 
1,650,394

Current portion of long-term debt
(5,500
)
 
(5,500
)
Long-term debt, net of current portion
$
1,652,592

 
$
1,644,894

As of March 31, 2016, annual maturities of long-term debt for the remainder of 2016 are $4.1 million. For 2017, 2018, 2019 and 2020, long-term debt maturities are $5.5 million, $135.5 million, $28.0 million and $867.0 million, respectively. Thereafter, total long-term debt maturities are $650.0 million.
Interest and debt expense were as follows:
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(In thousands)
Contractual interest:
 
 
 
Western obligations
$
12,052

 
$
12,007

NTI obligations
6,914

 
6,591

WNRL obligations
6,705

 
3,726

 
25,671

 
22,324

Amortization of loan fees
1,911

 
1,786

Other interest expense
(176
)
 
1,075

Capitalized interest
(725
)
 
(228
)
Interest and debt expense
$
26,681

 
$
24,957

We amortize original issue discounts and financing fees using the effective interest method over the respective term of the debt. Our creditors have no recourse to the assets owned by either of NTI or WNRL, and the creditors of NTI and WNRL have no recourse to our assets or those of our other subsidiaries.

15

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Western Obligations
Revolving Credit Facility
On October 2, 2014, we entered into the Third Amended and Restated Revolving Credit Agreement (the "Western 2019 Revolving Credit Facility"). Lenders committed $900.0 million, all of which will mature on October 2, 2019. The commitments under the Western 2019 Revolving Credit Facility may be increased in the future to $1.4 billion, subject to certain conditions (including the agreement of financial institutions, in their sole discretion, to provide such additional commitments). The amended terms of the agreement include revised borrowing rates. Borrowings can be either base rate loans plus a margin ranging from 0.50% to 1.00% or LIBOR loans plus a margin ranging from 1.50% to 2.00%, subject to adjustment based upon the average excess availability. The Western 2019 Revolving Credit Facility also provides for a quarterly commitment fee ranging from 0.25% to 0.375% per annum, subject to adjustment based upon the average utilization ratio, and letter of credit fees ranging from 1.50% to 2.00% per annum payable quarterly, subject to adjustment based upon the average excess availability. Borrowing availability under the Western 2019 Revolving Credit Facility is tied to the amount of our and our restricted subsidiaries' eligible accounts receivable and inventory. The Western 2019 Revolving Credit Facility is guaranteed, on a joint and several basis, by certain of our subsidiaries and will be guaranteed by certain newly acquired or formed subsidiaries, subject to certain limited exceptions. The Western 2019 Revolving Credit Facility is secured by our cash and cash equivalents, accounts receivable and inventory. The Western 2019 Revolving Credit Facility contains certain covenants, including, but not limited to, limitations on debt, investments and dividends and the maintenance of a minimum fixed charge coverage ratio in certain circumstances.
As of and during the three month period ended March 31, 2016, we had no direct borrowings under the Western 2019 Revolving Credit Facility, with availability of $201.0 million at March 31, 2016. This availability is net of $64.4 million in outstanding letters of credit.
Term Loan Credit Agreement
On November 12, 2013, we entered into a term loan credit agreement (the "Western 2020 Term Loan Credit Facility"). The Western 2020 Term Loan Credit Facility provides for loans of $550.0 million, matures on November 12, 2020, and provides for quarterly principal payments of $1.4 million until September 30, 2020, with the remaining balance then outstanding due on the maturity date. The Western 2020 Term Loan Credit Facility bears interest at a rate based either on the base rate (as defined in the Western 2020 Term Loan Credit Facility) plus 2.25% or the Eurodollar Rate (as defined in the Western 2020 Term Loan Credit Facility) plus 3.25% (with a Eurodollar Rate floor of 1.00%). The current interest rate based on these criteria is 4.25%. The effective rate of interest for the Western 2020 Term Loan Credit Facility was 4.65% as of March 31, 2016.
The Western 2020 Term Loan Credit Facility is secured by both the El Paso and Gallup refineries and is fully and unconditionally guaranteed on a joint and several basis by substantially all of Western's material wholly-owned subsidiaries. The Western 2020 Term Loan Credit Facility contains customary restrictive covenants including limitations on debt, investments and dividends and does not contain any financial maintenance covenants.
6.25% Senior Unsecured Notes
On March 25, 2013, we entered into an indenture (the "Western 2021 Indenture") for the issuance of $350.0 million in aggregate principal amount of 6.25% Senior Unsecured Notes due 2021 (the "Western 2021 Senior Unsecured Notes"). The Western 2021 Senior Unsecured Notes are guaranteed on a senior unsecured basis by each of our wholly-owned domestic restricted subsidiaries. We pay interest on the Western 2021 Senior Unsecured Notes semi-annually in arrears on April 1 and October 1 of each year. The Western 2021 Senior Unsecured Notes mature on April 1, 2021. The effective rate of interest for the Western 2021 Senior Unsecured Notes was 6.52% as of March 31, 2016.
NTI Obligations
Revolving Credit Facility
On September 29, 2014, certain subsidiaries of NTI entered into the Amended and Restated Revolving Credit Agreement (the "NTI Revolving Credit Facility"), increasing the aggregate principal amount available prior to the amendment and restatement from $300.0 million to $500.0 million. The NTI Revolving Credit Facility, which matures on September 29, 2019, incorporates a borrowing base tied to eligible accounts receivable and inventory and provides for up to $500.0 million for the issuance of letters of credit and up to $45.0 million for swing line loans. The NTI Revolving Credit Facility may be increased up to a maximum aggregate principal amount of $750.0 million, subject to certain conditions (including the agreement of financial institutions, in their sole discretion, to provide such additional commitments). Obligations under the NTI Revolving Credit Facility are secured by substantially all of NTI’s assets. Indebtedness under the NTI Revolving Credit Facility is

16

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

recourse to Northern Tier Energy GP LLC ("NTI LLC") and certain of its subsidiaries that are borrowers thereunder, its general partner, and is guaranteed by NTI and certain of its subsidiaries. Borrowings under the NTI Revolving Credit Facility bear interest at either (a) a base rate plus an applicable margin (ranging between 0.50% and 1.00%) or (b) a LIBOR rate plus an applicable margin (ranging between 1.50% and 2.00%), in each case subject to adjustment based upon the average historical excess availability. In addition to paying interest on outstanding borrowings, NTI is also required to pay a quarterly commitment fee ranging from 0.250% to 0.375% subject to adjustment based upon the average utilization ratio and letter of credit fees ranging from 1.50% to 2.00% subject to adjustment based upon the average historical excess availability. The NTI Revolving Credit Facility contains certain covenants, including but not limited to, limitations on debt, investments and dividends and the maintenance of a minimum fixed charge coverage ratio in certain circumstances. NTI incurred financing costs of $3.0 million associated with the amended and restated NTI Revolving Credit Facility.
At March 31, 2016, the availability under the NTI Revolving Credit Facility was $134.7 million. This availability is net of $22.5 million in direct borrowings and $29.4 million in outstanding letters of credit. The effective rate of interest for the Western 2020 Term Loan Credit Facility was 5.77% as of March 31, 2016.
7.125% Secured Notes
On November 8, 2012, NTI LLC and Northern Tier Finance Corporation (together with NTI LLC, the "NTI 2020 Notes Issuers"), issued $275.0 million in aggregate principal amount of 7.125% senior secured notes due 2020 (the "NTI 2020 Secured Notes").
NTI increased the principal amount of the NTI 2020 Secured Notes in September 2014 by an additional $75.0 million in principal value at a premium of $4.2 million. This additional offering was issued under the same indenture as the existing NTI 2020 Secured Notes and the new notes issued have the same terms as the existing notes. The offering generated cash proceeds of $79.2 million including an issuance premium of $4.2 million. NTI incurred financing costs of $2.5 million associated with this offering. The issuance premium will be amortized to interest expense over the remaining life of the notes. The effective rate of interest for the NTI 2020 Secured Notes was 6.91% as of March 31, 2016.
The obligations under the NTI 2020 Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Northern Tier Energy LP and on a senior secured basis by (i) all of NTI LLC’s restricted subsidiaries that borrow, or guarantee obligations, under the NTI Revolving Credit Facility or any other indebtedness of NTI LLC or another subsidiary of NTI LLC that guarantees the NTI 2020 Secured Notes and (ii) all other material wholly-owned domestic subsidiaries of NTI LLC. The indenture governing the NTI 2020 Secured Notes contains covenants that limit or restrict dividends or other payments from restricted subsidiaries. Indebtedness under the NTI 2020 Secured Notes is guaranteed by NTI and certain of its subsidiaries.
WNRL Obligations
Revolving Credit Facility
On October 16, 2013, WNRL entered into a $300.0 million senior secured revolving credit facility (the "WNRL Revolving Credit Facility"). WNRL has the ability to increase the total commitment of the WNRL Revolving Credit Facility by up to $200.0 million for a total facility size of up to $500.0 million, subject to receiving increased commitments from lenders and to the satisfaction of certain conditions. The WNRL Revolving Credit Facility includes a $25.0 million sub-limit for standby letters of credit and a $10.0 million sub-limit for swing line loans. Obligations under the WNRL Revolving Credit Facility and certain cash management and hedging obligations are guaranteed by all of WNRL's subsidiaries and, with certain exceptions, will be guaranteed by any formed or acquired subsidiaries. Obligations under the WNRL Revolving Credit Facility are secured by a first priority lien on substantially all of WNRL's and its subsidiaries' significant assets. The WNRL Revolving Credit Facility will mature on October 16, 2018. Borrowings under the WNRL Revolving Credit Facility bear interest at either a base rate plus an applicable margin ranging from 0.75% to 1.75%, or at LIBOR plus an applicable margin ranging from 1.75% to 2.75%. The applicable margin will vary based upon WNRL's Consolidated Total Leverage Ratio, as defined in the WNRL Revolving Credit Facility.

17

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

On October 15, 2014, to partially fund the purchase of certain assets from Western, WNRL borrowed $269.0 million under the WNRL Revolving Credit Facility. On February 11, 2015, WNRL repaid its outstanding direct borrowings under the WNRL Revolving Credit Facility with a portion of the proceeds from the issuance of its 7.5% Senior Notes due 2023 (the "7.5% Senior Notes"), discussed below. On October 30, 2015, WNRL borrowed $145.0 million under the WNRL Revolving Credit Facility to partially fund the purchase of the TexNew Mex Pipeline System from Western. On February 17, 2016, WNRL repaid $15.0 million of its outstanding direct borrowings under the WNRL Revolving Credit Facility.
The WNRL Revolving Credit Facility contains covenants that limit or restrict WNRL's ability to make cash distributions. WNRL is required to maintain certain financial ratios that are tested on a quarterly basis for the immediately preceding four quarter period. At March 31, 2016, the availability under the WNRL Revolving Credit Facility was $169.3 million, net of $130.0 million in direct borrowings and $0.7 million in outstanding letters of credit. WNRL had no swing line borrowings outstanding under the WNRL Revolving Credit Facility as of March 31, 2016. The interest rate for the borrowings under the WNRL Revolving Credit Facility was 2.69% as of March 31, 2016. The effective rate of interest for the WNRL Revolving Credit Facility was 2.76% as of March 31, 2016.
7.5% Senior Notes
On February 11, 2015, WNRL entered into an indenture (the “WNRL Indenture”) among WNRL, WNRL Finance Corp., a Delaware corporation and wholly-owned subsidiary of the Partnership (“Finance Corp.” and together with the Partnership, the “Issuers”), the Guarantors named therein and U.S. Bank National Association, as trustee (the “Trustee”) under which the Issuers issued $300.0 million in aggregate principal amount of 7.5% Senior Notes due 2023. The Partnership will pay interest on the 7.5% Senior Notes semi-annually in cash in arrears on February 15 and August 15 of each year, beginning on August 15, 2015. The 7.5% Senior Notes will mature on February 15, 2023. WNRL used the proceeds from the notes to repay the full balance due under the WNRL Revolving Credit Facility on February 11, 2015. The effective rate of interest for the 7.5% Senior Notes was 7.78% as of March 31, 2016.
The WNRL Indenture contains covenants that limit WNRL’s and its restricted subsidiaries’ ability to, among other things, (i) incur, assume or guarantee additional indebtedness or issue preferred units, (ii) create liens to secure indebtedness, (iii) pay distributions on equity securities, repurchase equity securities or redeem subordinated indebtedness, (iv) make investments, (v) restrict distributions, loans or other asset transfers from the Partnership’s restricted subsidiaries, (vi) consolidate with or merge with or into, or sell substantially all of the Partnership’s properties to, another person, (vii) sell or otherwise dispose of assets, including equity interests in subsidiaries and (viii) enter into transactions with affiliates. These covenants are subject to a number of important limitations and exceptions. The WNRL Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all the then outstanding Notes to be due and payable immediately.
10. Equity
Changes to equity during the three months ended March 31, 2016, were as follows:
 
Western Shareholders' Equity
 
Non-controlling Interest
 
Total Equity
 
(In thousands)
Balance at December 31, 2015
$
1,299,297

 
$
1,646,609

 
$
2,945,906

Net income
30,538

 
9,047

 
39,585

Dividends
(35,601
)
 

 
(35,601
)
Stock-based compensation
328

 
4,657

 
4,985

Tax deficiency from stock-based compensation
(328
)
 

 
(328
)
Distributions to non-controlling interests

 
(28,747
)
 
(28,747
)
Treasury stock purchases
(75,000
)
 

 
(75,000
)
Balance at March 31, 2016
$
1,219,234

 
$
1,631,566

 
$
2,850,800


18

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Changes to equity during the three months ended March 31, 2015, were as follows:
 
Western Shareholders' Equity
 
Non-controlling Interest
 
Total Equity
 
(In thousands)
Balance at December 31, 2014
$
1,119,708

 
$
1,667,936

 
$
2,787,644

Net income
105,989

 
68,979

 
174,968

Other comprehensive income, net of tax
8

 

 
8

Dividends
(28,638
)
 

 
(28,638
)
Stock-based compensation
1,001

 
2,503

 
3,504

Excess tax benefit from stock-based compensation
337

 

 
337

Distributions to non-controlling interests

 
(33,665
)
 
(33,665
)
Treasury stock purchases
(25,000
)
 

 
(25,000
)
Balance at March 31, 2015
$
1,173,405

 
$
1,705,753

 
$
2,879,158

Share Repurchase Programs
Our board of directors has periodically approved various share repurchase programs authorizing us to repurchase up to $200 million of our outstanding common stock, per program. Our board of directors approved our current share repurchase program in September of 2015 ("September 2015 Program"). The September 2015 program is scheduled to expire on December 31, 2016. Our common stock repurchase programs are subject to discontinuance by our board of directors at any time.
The following table summarizes our share repurchase activity for the September 2015 Program:
 
Number of shares purchased
 
Cost of share purchases
(In thousands)
Shares purchased at December 31, 2015

 
$

Shares purchased during Q1, 2016
2,462,350

 
75,000

Shares purchased at March 31, 2016
2,462,350

 
$
75,000

As of March 31, 2016, we had $125.0 million remaining in authorized expenditures under the September 2015 Program.
Dividends
The table below summarizes our 2016 cash dividend declarations, payments and scheduled payments:
 
Declaration Date
 
Record Date
 
Payment Date
 
Dividend per Common Share
 
Total Payment
(In thousands)
First quarter
January 6
 
January 20
 
February 4
 
$
0.38

 
$
35,601

Second quarter (1)
April 8
 
April 18
 
May 2
 
0.38

 

Total
 
 
 
 
 
 
 
 
$
35,601

(1) The second quarter 2016 cash dividend of $0.38 per common share will result in an estimated aggregate payment of $34.7 million.
NTI Distributions
The table below summarizes NTI's 2016 quarterly distribution declarations, payments and scheduled payments:
Declaration Date
 
Record Date
 
Payment Date
 
Distribution per Unit
February 3, 2016
 
February 12, 2016
 
February 19, 2016
 
$
0.38

Total
 
$
0.38

On April 29, 2016, the board of directors of NTI's general partner chose not to approve a quarterly distribution.

19

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

WNRL Distributions
The table below summarizes WNRL's 2016 quarterly distribution declarations, payments and scheduled payments:
Declaration Date
 
Record Date
 
Payment Date
 
Distribution per Common and Subordinated Unit
February 1, 2016
 
February 11, 2016
 
February 26, 2016
 
$
0.3925

April 25, 2016
 
May 13, 2016
 
May 27, 2016
 
0.4025

Total
 
$
0.7950

In addition to its quarterly distributions, WNRL paid incentive distributions of $0.8 million and $0.02 million for the three months ended March 31, 2016 and 2015, respectively, to Western as its general partner and holder of its incentive distribution rights.
11. Income Taxes
Compared to the federal statutory rate of 35%, our effective tax rates for the three months ended March 31, 2016 and 2015, were 32.0% and 25.4%, respectively. The effective tax rates for the three months ended March 31, 2016 and 2015, were lower than the statutory rate primarily due to the reduction of taxable income associated with the non-controlling interests in NTI and WNRL.
We are subject to examination by the Internal Revenue Service for tax years ending December 31, 2012, or after and by various state and local taxing jurisdictions for tax years ending December 31, 2011, or after.
We believe that it is more likely than not that the benefit from certain state net operating loss ("NOL") carryforwards related to the Yorktown refinery will not be realized. Accordingly, a valuation allowance of $20.8 million was previously provided against the deferred tax assets relating to these NOL carryforwards at March 31, 2016. There was no change in the valuation allowance for the Yorktown NOL carryforwards from December 31, 2015.
As of March 31, 2016, we have recorded a liability of $40.2 million for unrecognized tax benefits, of which $20.9 million would affect our effective tax rate if recognized. There was no material change for unrecognized tax benefits for the three months ended March 31, 2016. We also recognized $0.2 million and $0.1 million in interest and penalties for the three months ended March 31, 2016 and 2015, respectively.
12. Retirement Plans
We fully recognize the obligations associated with our retiree healthcare and other postretirement plans and NTI's single-employer defined benefit cash balance plan in our financial statements.
Pensions
The net periodic benefit cost associated with NTI's cash balance plan for both the three months ended March 31, 2016 and 2015, was $0.6 million.
Postretirement Obligations
The net periodic benefit cost associated with our postretirement medical benefit plans for the three months ended March 31, 2016 and 2015, was $0.03 million and $0.2 million, respectively.
Our benefit obligation at December 31, 2015, for our postretirement medical benefit plans was $6.2 million. We fund our medical benefit plans on an as-needed basis.

20

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table presents cumulative changes in other comprehensive income (loss) related to our benefit plans included as a component of equity for the periods presented, net of income tax. The related expenses are included in direct operating expenses in the Condensed Consolidated Statements of Operations.
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(In thousands)
Beginning of period balance
$
651

 
$
(1,291
)
Reclassification of loss to income

 
13

Income tax

 
(5
)
End of period balance
$
651

 
$
(1,283
)
Defined Contribution Plan
Western sponsors a 401(k) defined contribution plan under which Western and WNRL participants may contribute a percentage of their eligible compensation to various investment choices offered by the plan. For the three months ended March 31, 2016 and 2015, we expensed $2.0 million, respectively in both periods, in connection with this plan.
NTI sponsors qualified defined contribution plans for eligible employees. For the three months ended March 31, 2016 and 2015, NTI expensed $2.6 million and $2.2 million, respectively, in connection with its qualified defined contribution plans.
13. Crude Oil and Refined Product Risk Management
We enter into crude oil forward contracts primarily to facilitate the supply of crude oil to our refineries. During the three months ended March 31, 2016, we entered into net forward, fixed-price contracts to physically receive and deliver crude oil that qualify as normal purchases and normal sales and are exempt from derivative reporting requirements.
We use crude oil and refined products futures, swap contracts or options to mitigate the change in value for a portion of our LIFO inventory volumes subject to market price fluctuations. We enter into swap contracts to fix differentials on a portion of our future crude oil purchases and to fix margins on a portion of our future gasoline and distillate production. The physical volumes are not exchanged; these contracts are net settled with cash. These hedging activities do not qualify for hedge accounting treatment.
The fair value of these contracts is reflected in the Condensed Consolidated Balance Sheets and the related net gain or loss is recorded within cost of products sold in the Condensed Consolidated Statements of Operations. Quoted prices for similar assets or liabilities in active markets (Level 2) are considered to determine the fair values of the majority of the contracts for the purpose of marking the hedging instruments to market at each period end.
The following tables summarize our economic hedging activity recognized within cost of products sold for the three months ended March 31, 2016 and 2015, and open commodity hedging positions as of March 31, 2016 and December 31, 2015:
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(In thousands)
Economic hedging results
 
 
 
Realized hedging gain, net
$
17,803

 
$
17,553

Unrealized hedging loss, net
(12,483
)
 
(20,057
)
Total hedging gain (loss), net
$
5,320

 
$
(2,504
)

21

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
March 31,
2016
 
December 31,
2015
 
(In thousands)
Open commodity hedging instruments (barrels)
 
 
 
Crude oil differential swaps, net long positions
7,201

 
5,155

Crude oil futures, net short positions
(1,823
)
 
(562
)
Refined product price and crack spread swaps, net short positions
(2,900
)
 
(5,645
)
Total open commodity hedging instruments, net long (short) positions
2,478

 
(1,052
)
 
 
 
 
Fair value of outstanding contracts, net
 
 
 
Other current assets
$
67,064

 
$
78,125

Other assets
7,152

 
11,881

Accrued liabilities
(7,137
)
 
(10,273
)
Other long-term liabilities

 

Fair value of outstanding contracts - unrealized gain, net
$
67,079

 
$
79,733

Offsetting Assets and Liabilities
Western's derivative financial instruments are subject to master netting arrangements to manage counterparty credit risk associated with derivatives; however, Western does not offset the fair value amounts recorded for derivative instruments under these agreements in the Condensed Consolidated Balance Sheets. We have posted or received margin collateral with various counterparties in support of our hedging and trading activities. The margin collateral posted or received is required by counterparties as collateral deposits and cannot be offset against the fair value of open contracts except in the event of default.
The following table presents offsetting information regarding Western's commodity hedging contracts as of March 31, 2016 and December 31, 2015:
 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheet
As of March 31, 2016
 
 
 
(In thousands)
Financial assets:
 
 
 
 
 
Current assets
$
86,144

 
$
(19,080
)
 
$
67,064

Other assets
8,019

 
(867
)
 
7,152

Financial liabilities:
 
 
 
 
 
Accrued liabilities
(12,647
)
 
5,510

 
(7,137
)
Other long-term liabilities
(14,437
)
 
14,437

 

 
$
67,079

 
$

 
$
67,079


22

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheet
As of December 31, 2015
 
 
 
(In thousands)
Financial assets:
 
 
 
 
 
Current assets
$
95,062

 
$
(16,937
)
 
$
78,125

Other assets
11,881

 

 
11,881

Financial liabilities:
 
 
 
 
 
Accrued liabilities
(21,454
)
 
11,181

 
(10,273
)
Other long-term liabilities
(5,756
)
 
5,756

 

 
$
79,733

 
$

 
$
79,733

Our commodity hedging activities are initiated within guidelines established by management and approved by our board of directors. Due to mark-to-market accounting during the term of the various commodity hedging contracts, significant unrealized, non-cash net gains and losses could be recorded in our results of operations. Additionally, we may be required to collateralize any mark-to-market losses on outstanding commodity hedging contracts.
As of March 31, 2016, we had the following outstanding crude oil and refined product hedging instruments that were entered into as economic hedges. Settlement prices for our unleaded gasoline crack spread swaps range from $14.61 to $17.13 per contract. Settlement prices for our distillate crack spread swaps range from $7.08 to $12.19 per contract. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels):
 
Notional Contract Volumes by Year of Maturity
 
2016
 
2017
 
2018
Inventory positions (futures and swaps):
 
 
 
 
 
Crude oil differential swaps, net long positions
5,283

 
1,918

 

Crude oil futures, net short positions
(1,823
)
 

 

Refined products — net short positions
(999
)
 

 

Natural gas futures — net long positions
720

 
329

 

Refined product positions (crack spread swaps):
 
 
 
 
 
Distillate — net short positions
(744
)
 
(1,305
)
 

Unleaded gasoline — net short positions
(900
)
 

 

14. Stock-Based Compensation
Western Incentive Plans
The Western Refining 2006 Long-Term Incentive Plan (the "2006 LTIP") and the Amended and Restated 2010 Incentive Plan of Western Refining (the "2010 Incentive Plan") allow for restricted share unit awards ("RSUs") among other forms of awards. As of March 31, 2016, there were 19,856 and 2,418,248 shares of common stock reserved for future grants under the 2006 LTIP and the 2010 Incentive Plan, respectively. Awards granted under both plans vest over a scheduled vesting period of either one, three or five years and their market value at the date of the grant is amortized over the vesting period on a straight-line basis. Effective March 25, 2015, our board of directors approved administrative amendments to the 2010 Incentive Plan.
As of March 31, 2016, there were 656,290 unvested RSUs outstanding. We recorded stock compensation of $1.0 million and $1.0 million for the three months ended March 31, 2016 and 2015, respectively, which is included in selling, general and administrative expenses.
As of March 31, 2016, the aggregate grant date fair value of outstanding RSUs was $21.6 million. The aggregate intrinsic value of outstanding RSUs was $19.1 million. The unrecognized compensation cost of unvested RSUs was $19.6 million. Unrecognized compensation costs for RSUs will be recognized over a weighted-average period of 3.13 years.

23

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The tax deficiency related to the RSUs that vested during the three months ended March 31, 2016, was $0.3 million using a statutory blended rate of 38.1%. The aggregate grant date fair value of the RSUs that vested during the three months ended March 31, 2016, was $3.2 million. The related aggregate intrinsic value of these RSUs was $2.4 million at the vesting date.
The excess tax benefit related to the RSUs that vested during the three months ended March 31, 2015, was $0.3 million using a statutory blended rate of 38.1%. The aggregate grant date fair value of the RSUs that vested during the three months ended March 31, 2015, was $1.9 million. The related aggregate intrinsic value of these RSUs was $2.8 million at the vesting date.
The following table summarizes our RSU activity for the three months ended March 31, 2016:
 
Number
of Units
 
Weighted Average
Grant Date
Fair Value
Not vested at December 31, 2015
399,214

 
$
37.43

Awards granted
339,618

 
29.60

Awards vested
(79,118
)
 
40.71

Awards forfeited
(3,424
)
 
43.81

Not vested at March 31, 2016
656,290

 
32.95

NTI 2012 Long-Term Incentive Plan
There are 6,659,555 NTI common units reserved for issuance under the NTI 2012 Long-Term Incentive Plan ("NTI LTIP"). NTI has awarded both restricted units and phantom units under the NTI LTIP. The NTI LTIP permits the award of unit options, restricted units, phantom units, distribution equivalent rights, unit appreciation rights and other awards that derive their value from the market price of NTI's common units.
As of March 31, 2016, 1,536,998 units were outstanding under the NTI LTIP. NTI recognizes the expense on all NTI LTIP awards ratably from the grant date until all units become unrestricted or vest. Service-based awards generally vest ratably over a three-year period beginning on the award's first anniversary date and performance-based awards generally vest following the end of the measurement period which, for the performance-based phantom awards, has traditionally been three years after the commencement of the measurement period. Compensation expense related to these restricted units is based on the grant date fair value as determined by the closing market price on the grant date, reduced by the fair value of estimated forfeitures. For awards to employees, NTI estimates a forfeiture rate that is subject to revision depending on the actual forfeiture experience.
As of March 31, 2016 and December 31, 2015, the total unrecognized compensation cost for NTI LTIP units was $26.3 million and $16.1 million, respectively.
NTI incurred $4.6 million and $2.6 million of unit-based compensation expense for the three months ended March 31, 2016 and 2015, respectively.
Restricted Common Units
As of March 31, 2016, NTI had 157,370 restricted common units outstanding. Upon vesting, these common units will no longer be restricted. All restricted common units participate in distributions on an equal basis with NTI common units and must be paid no later than 30 days after the distribution date to common unitholders. For restricted common unit awards outstanding at March 31, 2016, the forfeiture rates on NTI LTIP awards ranged from zero to 30%, depending on the employee classification and the length of the award's vesting period. NTI has one restricted common unit award with a clause stating distributions are to be accrued until the underlying units vest, at which time the accrued distributions applicable to those units will be paid to the award holder. The accrued distributions on that award at March 31, 2016 and December 31, 2015, were $0.8 million and $0.7 million, respectively.
Phantom Common Units
Service-based Awards
During 2014, NTI began awarding service-based phantom common units to certain employees. As of March 31, 2016, NTI had 726,842 service-based phantom common units outstanding. Upon vesting, NTI may settle these units in NTI common units or cash at the discretion of NTI's board of directors or its Compensation Committee. Like the restricted common units, the phantom common units participate in distributions on an equal basis with common units. However, distributions on phantom

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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

common units are accrued until the underlying units vest at which time the distributions are paid in cash. In the event that unvested phantom common units are forfeited or canceled, any accrued distributions on the underlying units are forfeited by the grantee. As of March 31, 2016 and December 31, 2015, NTI had $1.7 million and $2.5 million, respectively, in accrued service-based phantom common unit distributions included in accrued liabilities and other liabilities in the Condensed Consolidated Balance Sheets. For phantom common unit awards outstanding at March 31, 2016, the forfeiture rates on NTI LTIP awards ranged from zero to 20%, depending on the employee classification.
Performance-based Phantom Units
As of March 31, 2016, NTI had 652,786 outstanding Performance-based Phantom Common Units ("NTI Performance LTIPs"), under the NTI LTIP. Assuming a threshold EBITDA is achieved, participants are entitled to an award under the NTI Performance LTIPs based on NTI’s achievement of two criteria compared to the performance peer group selected by the Compensation Committee over the performance period: (a) return on capital employed, referred to as a performance condition and (b) total unitholder return, referred to as a market condition. NTI accounts for the performance conditions and market conditions in each NTI Performance LTIPs as separate awards. Each of the performance condition awards and market condition awards represent the right to receive NTI common units or cash, or a combination of both, at the discretion of NTI's board of directors or its Compensation Committee, at the end of a three-year performance period, in an amount ranging from 0% to 200% of the original number of units granted depending on NTI’s achievement of the performance conditions and market conditions, respectively.
Performance Condition Awards. The 652,786 NTI Performance LTIPs include 342,695 performance condition awards. The fair value of performance condition awards is estimated using the market price of NTI's common units on the grant date and NTI management's assessment of the probability of the number of performance condition awards that will ultimately be awarded. The estimated fair value of these performance condition awards is amortized over a three-year vesting period using the straight-line method. On a quarterly basis, NTI estimates the ultimate payout percentage, relative to target, and adjusts compensation expense accordingly. At March 31, 2016, NTI estimates that a weighted average of 200% of the target unit count will be achieved at the end of the vesting term.
Market Condition Awards. The 652,786 NTI Performance LTIPs include 310,091 market condition awards. The estimated fair value for market condition awards is estimated using a Monte Carlo simulation model as of the grant date and the related expense is amortized over a three-year vesting period using the straight-line method. The compensation expense relating to the market condition awards is determined at the award's date and expensed ratably at a fixed rate over the vesting term. However, for purposes of the phantom common unit activity table below, NTI estimates that at March 31, 2016, a weighted average of 181% of the target unit count will be achieved at the end of the vesting term.
Expected volatilities are based on the historical volatility over the most recent three-year period. The risk-free rate is based on the U.S. Treasury yield curve in effect at the date of valuation. The assumptions used in the Monte Carlo simulation used to value NTI's market condition awards as of March 31, 2016, are presented below:
 
2016 Awards
 
2015 Awards
Expected volatility
29.80
%
 
34.10
%
Risk-free interest rate
1.08
%
 
0.84
%
As of March 31, 2016 and December 31, 2015, NTI had $1.5 million and $1.0 million, respectively, in accrued performance-based phantom common unit distributions included in accrued liabilities in the Condensed Consolidated Balance Sheets.

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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A summary of the NTI LTIP common unit activity for the three months ended March 31, 2016, is set forth below:
 
Restricted Units
 
Phantom Units
 
 
Service-Based Units
 
Performance-Based Units
 
Total
 
Weighted Average
Grant Date
Fair Value
 
Number of Units
 
Weighted Average
Grant Date
Fair Value
 
Number of Units
 
Number of Units
 
 
Not vested at December 31, 2015
191,424

 
$
24.75

 
581,882

 
260,690

 
842,572

 
$
24.00

Awards granted

 

 
381,029

 
163,571

 
544,600

 
30.27

Incremental performance units

 

 

 
231,777

 
231,777

 
38.17

Awards vested
(34,054
)
 
26.84

 
(235,546
)
 
(1,789
)
 
(237,335
)
 
24.05

Awards forfeited

 

 
(523
)
 
(1,463
)
 
(1,986
)
 
24.01

Not vested at March 31, 2016
157,370

 
24.30

 
726,842

 
652,786

 
1,379,628

 
28.90

Western Refining Logistics, LP 2013 Long-Term Incentive Plan
The Western Refining Logistics, LP 2013 Long-Term Incentive Plan (the "WNRL LTIP") provides, among other awards, for grants of phantom units and distribution equivalent rights. As of March 31, 2016, there were 4,111,322 phantom units reserved for future grants under the WNRL LTIP.
The fair value of the phantom units is determined based on the closing price of WNRL common units on the grant date. The estimated fair value of the phantom units is amortized on a straight-line basis over the scheduled vesting periods of individual awards. WNRL incurred unit-based compensation expense of $0.5 million and $0.4 million for the three months ended March 31, 2016 and 2015, respectively.
The aggregate grant date fair value of non-vested phantom units outstanding as of March 31, 2016, was $7.9 million. The aggregate intrinsic value of such phantom units was $6.9 million. Total unrecognized compensation cost related to unvested phantom units totaled $7.4 million as of March 31, 2016, that is expected to be recognized over a weighted-average period of 3.12 years.
A summary of WNRL's common and phantom unit award activity for the three months ended March 31, 2016, is set forth below:
 
Number of Phantom Units
 
Weighted Average
Grant Date
Fair Value
Not vested at December 31, 2015
279,787

 
$
28.06

Awards granted
75,919

 
22.53

Awards vested
(60,705
)
 
26.80

Awards forfeited

 

Not vested at March 31, 2016
295,001

 
26.64

15. Earnings per Share
We follow the provisions related to the accounting treatment of certain participating securities for the purpose of determining earnings per share. These provisions address share-based payment awards that have not vested and that contain nonforfeitable rights to dividend equivalents and state that they are participating securities and should be included in the computation of earnings per share pursuant to the two-class method.
Diluted earnings per common share includes the effects of potentially dilutive shares that consist of unvested RSUs. These awards are non-participating securities due to the forfeitable nature of their associated dividend equivalent rights, prior to vesting and we do not consider the RSUs in the two-class method when calculating earnings per share.

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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The computation of basic and diluted earnings per share under the two-class method is presented as follows:
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(In thousands, except per share data)
Basic earnings per common share:
 
 
 
Allocation of earnings:
 
 
 
Net income attributable to Western Refining, Inc.
$
30,538

 
$
105,989

Distributed earnings
(35,601
)
 
(28,638
)
Undistributed income (loss) available to Western Refining, Inc.
$
(5,063
)
 
$
77,351

Weighted-average number of common shares outstanding
92,078

 
95,567

Basic earnings per common share:
 
 
 
Distributed earnings per share
$
0.39

 
$
0.30

Undistributed earnings (loss) per share
(0.05
)
 
0.81

Basic earnings per common share
$
0.34

 
$
1.11

 
 
 
 
Diluted earnings per common share:
 
 
 
Net income attributable to Western Refining, Inc.
$
30,538

 
$
105,989

Weighted-average diluted common shares outstanding
92,144

 
95,682

Diluted earnings per common share
$
0.33

 
$
1.11

The computation of the weighted average number of diluted shares outstanding is presented below:
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(In thousands)
Weighted-average number of common shares outstanding
92,078

 
95,567

Restricted share units
66

 
115

Weighted-average number of diluted shares outstanding
92,144

 
95,682

A shareholder's interest in our common stock could become diluted as a result of vestings of RSUs. In calculating our fully diluted earnings per common share, we consider the impact of RSUs that have not vested. We include unvested RSUs in our diluted earnings calculation when the trading price of our common stock equals or exceeds the per share or per share unit grant price. In connection with the Merger Agreement, we may grant additional RSUs to NTI employees. The Merger Agreement is expected to result in 17.2 million additional shares of Western Common Stock outstanding. The issuance of these additional shares may have a dilutive impact on our earnings per share.
16. Cash Flows
Restricted Cash
Restricted cash reported in our Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015, relates to net proceeds from the sale of Western's TexNew Mex Pipeline System to WNRL. This cash is restricted through October 30, 2016, and must be used to reinvest in assets used in our business or as an offer of prepayment to lenders under the Western 2020 Term Loan Credit Facility.

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WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Supplemental Cash Flow Information
Supplemental disclosures of cash flow information were as follows:
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(In thousands)
Income taxes paid
$
11,215

 
$
40,009

Interest paid, excluding amounts capitalized
20,676

 
8,959

 
 
 
 
Non-cash investing and financing activities were as follows:
 
 
 
Assets acquired through capital lease obligations
$
328

 
$
19,511

Accrued capital expenditures
46,045

 
12,741

Distributions receivable from equity method investee

 
3,740

Distributions accrued on unvested NTI equity awards
3,964

 

Transfer of capital spares from fixed assets to other assets
699